Ensuring you’re a Good Fit: Why Culture Matters in Mergers and Acquisitions

By Gary Smith

July 28, 2016

On paper, a proposed merger or acquisition may seem like a match made in heaven. So is it going to work? Company culture counts – more so than the dry financials. If the ‘spirit’ of the original organisation is extinguished, so too are the prospects of a long-lasting and happy marriage.

Flickr was created by husband and wife team, Stewart Butterfield and Caterina Fake back in 2003. It was essentially a by-product: a photo sharing feature they had added to their core offering, ‘Game Neverending’. But Flickr had outgrown the game; in short, the pair had managed to come up with the best tool around for sharing photos online.

The entrepreneurial couple had a hit on their hands – which inevitably meant that the big boys came a-knocking with offers of acquisition. But the Flickr founders didn’t just want to sell out, take a huge payoff and become subsumed: they wanted guidance, support and the room to flourish – and so they turned to Yahoo.

Flickr’s culture was focused on its community; which meant constantly asking “What do our users want?” and “What features can we introduce to ensure those needs are met?”. But post-acquisition, the company got out of the habit of asking these questions. Flickr had been swallowed up in terms not just of its product, but its culture too. The focus had shifted to integration: on ensuring it ‘fitted in’ with its new masters. In his commentary on what happened, Mat Honan describes a “stunning failure in vision” where all Yahoo cared about was Flickr’s database of users – but not on its sense of community.

Flickr no longer knew who it was, its culture of innovation was lost. And how did this manifest itself? By the company missing the boat “on local, on real time, on mobile, and even ultimately on social – the field it pioneered.” It no longer asked the right questions and consequently no longer had a product that anyone was much interested in.

Compare this to Instagram joining the Facebook stable. Post-buyout, Instagram product manager, Gregor Hochmuth described a review meeting with the Facebook boss, illustrating Mark Zuckerberg’s attitude to his new purchase: “Well usually I would tell a team what to do now… but I really want to stick to my word and have you guys be in charge. So I’m going to give you my advice and you can take it or leave it…”

If you pay $1 billion for something, you’d be tempted to tinker with it and try to mould it into an image that reflects what’s important to you. But Zucks took a different tack, because he’s canny enough to realise where the value of Instagram lies. A very particular way of doing things, an understanding of what its users want, a certain way of approaching problems: what’s important to the Instagram team was unique to them, and this had given birth to a uniquely appealing and therefore valuable social platform.

If he decides to start messing around with Instagram’s culture, by dictating a new set of priorities and generally trying to make the company more “Facebook-y”, then what happens? You start to see it in the product; Instagram would become less like itself and more like Facebook. It wouldn’t happen overnight – but it would still happen – to the point where Instagram users start asking “What’s the point of this platform anymore?”.

Bringing two tribes together

The whole point of a merger is to add value; the idea being that the merged entities are worth more together than they are separately. So when AOL and Time Warner came together at the turn of this century, expectations were high. These two giants of old and new media were going to feed off each other’s market strengths – and each would benefit.

So why didn’t things turn out that way?

The example of Flickr shows what happens when a company’s unique spirit and whole reason for being is extinguished. The Time/AOL merger looked very different (this was, after all, billed as a marriage of equals). But it highlights a different type of M&A peril; where two fundamentally mismatched tribes have to find a way to work together. As former Time Warner boss Richard Parsons put it, “…it was beyond certainly my abilities to figure out how to blend the old media and the new media culture. They were like different species, and in fact, they were species that were inherently at war”.

And even members of the same “species” can have different ideas about what they want to achieve and how to achieve it. Take the species of bankers, for instance. Deutsche Bank’s investment arm was a market leader; it had a very particular way of doing things and a clear strategic vision. In 2000, a proposed merger with Dresdner Bank failed – in part because the vision for the newly merged company wasn’t clear. Top employees jumped ship, while many more threatened to leave, forcing Deutsche to abandon the deal.

“In any M&A, don’t wipe everything out. Find one thing that was good and use it as a cornerstone for a new culture. People don’t want to work for an organisation for years and then be told it’s rubbish.” – Bob Every, Boral.

Contrast this with the pairing of a Scandinavian multinational and a small Northern Irish bank. Since 1809, Northern Bank had been a presence on Ulster high streets. It was about personal service and the manager knowing each customer’s name – “old fashioned” in the best sense. When it was acquired by Danske Bank, there was an inevitable streamlining of the business, but the traditions and culture of the original bank were kept in place: the vision of the original company wasn’t eliminated, but instead brought up to date (with a small business hub, a charitable fund and a new focus on employee wellbeing). The cultures of the two organisations were aligned – and the merger was a success.

Is this deal going to work? Take a look at the intangibles

When Capco Institute looked at banking M&As, it found that the prospects of success depend less on the “degree of similarity of the outputs produced” (i.e. the product), than on the “compatibility of the structures” (whether the two organisations are going to be a good match for each other). So you’d think that compatibility would be top of the things to look at when considering a takeover or merger. Not so, it seems. Hay Group found that just 3% of mergers and acquisitions by UK companies are deemed a complete success.

We do our “due diligence” and get someone in to pore over the books; we also do our homework on things like “IT systems integration”. But more than half execs surveyed by Hay said that “over-prioritising systems integration resulted in insufficient focus on intangible assets and cultural integration”.

As David Derain, Hay Group European M&A Director put it: “Business leaders must recognise that the value of today’s companies is primarily in their intangible assets – the strategic, people and cultural factors that don’t show up on a balance sheet”. If these aren’t aligned, you could find out – as Daimler and Chrysler did – that you’re in partnership with someone with a completely different vision of what the business is for and how you should move forward.

You’ll leak talent, too. If your vision is lost, staff become disillusioned and move on. And it’s not just an initial cull of malcontents: Jeffrey Krug found that the attrition rate for execs at merged firms was twice the average for companies that have never gone through a merger a full nine years after the event.

So if you are to merge, go in with eyes wide open. Asking if the figures add up isn’t enough; you need to be clear on whether the cultures add up too.

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